Relevance: GS-2: Bilateral, regional and global groupings and agreements involving India and/or affecting India’s interests.

Key Phrases: BIMSTEC, Bay of Bengal, Bridge of Connectivity, Transport Connectivity, Electricity Grid Inter-Connectivity, Labour Surplus Economy, Economies of Scale, Global Value Chain, Northeast, Indian diaspora, Border Infrastructure, TIR Convention.

Why in News?

• Transport connectivity between India’s N-E and the eastern neighbourhood can improve. But trade gains per se seem limited.

Context:

• After a gap of four years, the BIMSTEC (comprising Bangladesh, Bhutan, India, Mynamar, Nepal, Sri Lanka, and Thailand) summit was held virtually in last week of March to deliberate on the prospects and way forward of this regional group.
• BIMSTEC group was formed in 1997, but not much happened over the years even though it brings together 1.67 billion people and a combined GDP of $2.88 trillion.
• In his address, Prime Minister Narendra Modi urged the member nations of BIMSTEC to make the Bay of Bengal, bridge of connectivity, bridge of prosperity, and bridge of security. He argued that BIMSTEC must also move fast on the ongoing initiatives in the field of transport connectivity based on the BIMSTEC's Master Plan for Transport Connectivity, prepared by ADB.
• Simultaneously, the time has come to take electricity grid inter-connectivity ahead in discussions and introduce it on the ground to ensure energy security.
• It must be appreciated that the Prime Minister has been on dot regarding the role of BIMSTEC from India’s point of view. From the political economy context, it is a good move to isolate Pakistan and develop closer economic cooperation with our neighbours. It has a positive impact on the development of north-eastern States as it creates level playing field in the production process by reducing transport costs as inputs may be brought from neighbouring countries at a lower cost.
• India as well as other neighbouring countries on the east can gain mutually. This way, India’s act East policy may strengthened.
• However, it would be wrong to expect too much from BIMSTEC as some economists argue since it runs against the doctrine of trade theory.

Rationale for Trade

Countries engage in international trade for two basic reasons, each of which contributes to their gain from trade.

• Firstly, countries trade because they are different from each other. Nations like individuals can benefit from their differences by reaching an arrangement in which each does things in which it has a relative advantage. That is, trade between two countries can benefit only if each country exports the goods in which it has a comparative advantage. This is the basic proposition of the Heckscher-Ohlin theory of trade which states that countries tend to export goods that are intensive in the factors they are abundantly endowed with.
• In lay man’s language, it implies that a labour surplus economy like India would export labour intensive goods while a capital surplus economy such as US should export capital intensive goods.
• Secondly, countries trade to achieve economies of scale in production. That is if each country produces only a limited range of goods, it can produce each of these goods at larger scale and hence more efficiently than if it tried to produce everything.
• It is economies of scale that keep each country from producing the full range of products for itself; thus economies of scale can be an independent source of international trade. Intra-industry trade plays a large role in the trade in manufactured goods among advanced industrialised nations.
• If these are the two premises under which countries can gain from trade, let us examine to what extent these are applicable for the members of BIMSTEC. As it stands, BIMSTEC is essentially a trading bloc of labour abundant economies. All these countries have shortage of capital. Thus, the member nations cannot gain from BIMSTEC under the first premise.

Can the BIMSTEC members benefit from economies of scale in production?

• Economies of scale is a phenomenon of capital intensive goods. Since they have comparative advantage in producing labour intensive goods, this does not hold for the members of BIMSTEC. In the European Union where this has played a major role in harnessing the gain of free trade, a large part of it can be attributed to the intra-firm trade of the multinational enterprises. But they have an insignificant presence in the member nations.
• Of late, being part of a global value chain have led to gains from trade for countries. All the members of BMSTEC are desperately seeking to be part of global value chain by offering tax incentives. Except Thailand, none of them have been successful in this venture. However, all members of BIMSTEC aspire to tie up with technologically developed Asian countries like Korea, Japan, etc. outside this group. Thus, there is little scope that members would gain from this channel.
• In sum, improved connectivity will usher in lower trade cost which could be the driving force for gains from BIMSTEC.

BIMSTEC role in development in Northeast:

BIMSTEC can play an instrumental role in promoting and preparing the Northeast to unleash its potential by hosting various connectivity projects for sub regional development. This effort must begin by developing the Northeast through the following ways:

• Integrating the Northeast with the rest of India through stronger infrastructure linkages will build a robust cross-border production chain network, particularly with Southeast Asia and Bangladesh.
• Re-establishing ties with the Indian diaspora in Bangladesh, Myanmar, and Thailand is important to engage them in cross-border investments for cultural collaborations or even greater people-to-people contact.
• Economic collaboration and investment programmes with the neighbouring countries through industrial parks (such as those being developed by the ADB in Assam).
• Special economic zones can also be set up for specific projects like timber and food processing in the eight Northeast states. Smart cities can also be established.
• The Northeast states must expedite the completion of ongoing rail, road, inland water transport and aviation projects, and improve border infrastructure with adequate storage facilities.
• The states must focus on capacity building to complete projects on time.
• The signing of the Convention on International Transport of Goods Under Cover of TIR Carnets (TIR Convention) will facilitate seamless trade and transportation in the region. India has ratified the TIR Convention, while Bangladesh and Myanmar are yet to do so. India may play a constructive role to encourage the two nations to ratify it soon.
• Greater focus is needed to enhance the connectivity of inland waterways and river routes in the Northeast, like the Sagar project in West Bengal. Multimodal connectivity in this regard is essential for greater linkages.
• The Northeast is culturally rich and is a biodiversity hotspot. It has huge potential to attract tourists from BIMSTEC countries, and here, the adoption of a connectivity master plan is crucial. To facilitate greater tourism, policymakers must prioritise the easing of visa requirements and consider implementing visa-free travel or visa-on-arrival schemes for certain destinations.

Once the Northeast achieves stability and meets its development goals, a symbiotic relationship can be created between the region and BIMSTEC through connectivity projects. This will be dependent on the ability not only of the governments and policymakers, but also of the people of the Northeast, to visualise and actualise the potential of such multilateral engagements.

Way forward:

• The Bay of Bengal can be showcased as open and peaceful, contrasting with China’s behaviour in the South China Sea. “It could develop codes of conduct that preserve freedom of navigation and apply existing law of the seas regionally. In addition, BIMSTEC could stem the region’s creeping militarisation by instituting, for instance, a Bay of Bengal Zone of Peace that seeks to limit any bellicose behaviour of extra-regional power.

Source: The Hindu BL

Mains Question:

Q. ‘BIMSTEC can play an instrumental role in promoting and preparing the Northeast to unleash its potential by hosting various connectivity projects for sub regional development’. Critically analyse the statement.